Not to be outdone by the feds, the Kentucky Legislature at the last possible moment in the 2018 legislative session passed a tax overhaul bill. This bill had numerous provisions that will affect both individuals and businesses. Some of the highlights are outlined below.
Changes For Individuals
- During 2017 and previous years, Kentucky has had a graduated system of individual tax rates, beginning at 2% and maxing out at 6% for income amounts over $8,000. Those graduated rates have been replaced by a flat tax rate of 5% on all taxable income. Since the $8,000 level of income that caused an individual to reach maximum rates was so low under the previous rules, this new flat tax rate will mean tax savings for most individuals. This is effective for tax year 2018 and forward.
- In prior years, Kentucky income taxes were reduced by a credit for each individual who could be claimed as an exemption who lived in your household, assuming that you were supporting that individual – which was likely if they were living with you! Like the changes to the US income tax structure, there will no longer be a credit for you (or your spouse and kids) for 2018 and future years.
- The personal itemized deductions that many taxpayers could claim under the previous system have been greatly restructured for 2018 and future years. In the past, you could claim medical expenses, local income taxes, property taxes on your home and cars, mortgage interest, charity contributions, work related expenses, investment fees, fees paid to tax preparers, union dues and some attorneys’ fees. The new tax laws only recognize two itemized deductions for 2018 and future years – mortgage interest and charitable contributions. The list of what is excluded is long, but most significantly, health insurance premiums and real estate taxes stand out. Those two in particular are very common deductions that will no longer reduce your Kentucky taxes.
- For retired folks, Kentucky has had a tax rule that has allowed each individual to only pay taxes on retirement income (pensions, IRA’s and annuities) that exceeded $41,110 each year. If your retirement income was $50,000, only $8,890 would be taxed on your Kentucky tax return. This has allowed individuals with retirement income as their primary source of income to pay little or no Kentucky taxes in previous years. For 2018 and future years, this amount is being lowered to $31,110 per year per person.